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Cisco earnings beat the Street

Crazy growth for new products

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Cisco might not be ready to call an end to the economic meltdown, but Wall Street is probably going to read it that way - despite words of caution from the networking giant's chairman and CEO, John Chambers.

You can't blame Wall Street, and indeed investors and the rest of the IT industry, for trying to find some good news. And with Cisco's sales shooting ahead of guidance - up 27 per cent to $10.4bn in its third quarter of fiscal 2010, which ended on May 1, along with net earnings of $2.2bn, up 63 per cent - optimism is probably warranted.

Add to that Chambers calling fiscal Q3 "probably the strongest quarter in the company's history" and the company's switch to year-on-year instead of sequential comparisons going forward as it talks about financial metrics, and it sure smells like things are getting back to normal in the IT racket.

About 4 to 5 points of that revenue growth came from having an extra week in the quarter, which Chambers says happens every five to six years at Cisco. But still...

For the quarter, product revenues rose by 31 per cent to $8.5bn across all lines, while services revenues were up a more-muted 11 per cent to $1.9bn. Seeing as how Cisco is undergoing a huge number of product transitions at the moment in its switching and routing products, as well as entering new markets (particularly servers) and expanding its presence in other markets (significantly telepresence with the Tandberg acquisition), you might expect some slowdown on product sales. Not so. Routers saw a 23 per cent growth in Q3 to $1.7bn, and switches posted the highest revenues and growth rates in the company's history, with $3.7bn in revenues, up 40 percent compared to Q3 of fiscal 2009.

Advanced Technologies - a product bucket into which a whole slew of things get tossed - had an 18 per cent sales boost in Q3, hitting $2.4bn. Within this group, Unified Communications products had a 26 per cent revenue boost and storage sales doubled; security was up 15 per cent and wireless products were up 27 per cent.

Other product areas had a 71 per cent growth rate in Q3, hitting $630m. Cisco's "California" Unified Computing System blade servers are in this group, along with their integrated converged switches as well as the Cisco rack servers. While Cisco did not give revenue for its servers, Chambers did say that UCS had a sequential revenue growth of 168 per cent and sequential order growth of 83 per cent. He added that as fiscal Q2 ended, UCS had 370 customers and as Q3 ended, the UCS customer base had more than doubled to over 900 unique customers.

The line of Nexus converged switches is seeing explosive growth. The core Nexus 7000 switches had 281 per cent sequential growth and are now at an annualized run rate of over $1bn, according to Chambers. The end-of-row Nexus 5000 switches had 425 per cent sequential growth and now have a run rate of $250m, and the top-of-rack Nexus 2000 switches are running at an annualized rate of about $160m, with sequential growth from fiscal Q2 of 486 per cent. Cisco now has more than 2,000 Nexus customers and has shipped over 1 million 10 Gigabit Ethernet ports. Chambers said that the ASR family of routers had 2,300 customers as the quarter ended, up from 1,600 in fiscal Q2.

Chambers said that not only were revenues balanced across products, but also across geographies. "It was a remarkable balance," he said. In the US and Canada, sales rose by 29 per cent to $5.6bn, sales in Europe were up 15 per cent to $2.1bn, Asia/Pacific saw a 41 per cent bump to $1.1bn, and Japan was up 25 per cent to $400m. Emerging markets accounted for $1.1bn in the quarter, rising 30 percent. Cisco said that orders were up 34 per cent in the US, 28 in the United Kingdom, 27 in France, 23 in the Netherlands, and 28 in Switzerland. Sales were only up 12 per cent in Germany and were actually down 1 per cent in Italy.

Looking ahead to the fiscal fourth quarter, Cisco is facing a tougher compare and says that it will do about 3 to 5 per cent sequential growth, which would put it at between $10.7bn to $10.9bn. Including revenues from the Tandberg unit, that puts Q4 at somewhere between 25 to 28 per cent compared to fiscal 2009's final quarter. ®